Just say no to the Bell-MTS takeover

Last week, Bell announced a $3.1 billion deal to takeover MTS, Manitoba’s incumbent communications company. Bell is promising a windfall to stockholders, who will see their shares purchased for $40 a piece, or 20% over the share price at the time of the announcement. For regular customers, on the other hand, there’s little to celebrate about the deal. One need only look to other provinces where Bell, Rogers, and Telus have a three-way split on the wireless market to get an idea of what the merger will really mean: less choice and higher prices.

Despite ill informed claims from free-marketeers at the Financial Post and elsewhere, this deal isn’t about saving Manitobans from the threat of “ruinous competition.” As Carleton Professor Dwayne Winseck has decisively shown, MTS might not be perfect, but it has been at the front of the pack with respect to broadband, wireless, and next-generation TV services, and is well ahead of companies like Bell with respect to relative earnings. Every sign points to the takeover being simply an effort by Bell to increase dividend payouts for its shareholders by acquiring Prairie subscribers and then raising their rates.

While the investment community collectively rub their hands together in expectation of the spoils, the deal still has to pass several regulatory hurdles.

Bell expects the process to be over within a year. In the meantime, it’s been busy painting a rosy picture of the post-transaction landscape. It has already made several preemptive concessions in the hopes of getting out ahead of concerns that reducing the number of wireless carriers from four to three will result in less competition and choice for Manitobans. Bell has promised to divest itself of roughly a third of MTS’s wireless subscribers and a third of their retail stores to Telus. As well, commitments have been made to invest $1 billion over 5 years in the province’s networks, although this in fact merely maintains existing levels of planned investment.

But while Bell CEO George Cope tells investors and all who are listening that “the market will continue to be as competitive as it has and if not maybe even more as a result of all this,” regulators and ordinary Manitobans shouldn’t be fooled. The initial concessions that Bell is offering up are carefully calculated to meet certain review standards, but claims about “more competition” post-merger quickly crumble under the slightest scrutiny.

The first stop for the proposed transaction will be at the Competition Bureau’s doorstep. The Bureau is tasked to review mergers with an eye to ensuring that they won’t result in a “substantial lessening or prevention of competition,” and that a post-merger landscape won’t result in firms holding “market power” — that is, the power to raise prices above competitive levels. While some may be skeptical of the Bureau’s resolve when confronting large mergers, we would do well to remember that this is the same agency that in 2014 told the CRTC “that the incumbents possess market power in retail mobile wireless services markets in Canada” and produced an independent report showing that “Canadian retail mobile wireless services markets are characterized by above-normal profits.

This week, the Bureau announced that its review is now open, and that it’s soliciting views from the public (that’s you!) In what follows, I lay out three things that need to be considered, mainly related to the wireless market, which is where the effects of the merger will be felt the most.

First, in other provinces where Bell, Telus, and Rogers are the dominant providers, wireless prices are much higher, and unlimited data plans are rare. The only thing currently keeping Manitobans from having to pay the higher prices faced elsewhere is MTS. After the transaction, there will be no fourth carrier left to bar the way of the regular price increases that Bell, Rogers, and Telus get away with in other provinces (see also here, herehere, here, and here.)

Second, not only will the merger remove a vigorous competitor from the marketplace, it’s unlikely any new providers will emerge to challenge the tightened oligopoly. As the Competition Bureau itself noted in 2014, “Canadian mobile wireless services markets are characterized by high concentration and very high barriers to entry and expansion.” In other words, those looking for Shaw-Wind to step in shouldn’t hold their breath. While Shaw does have wired facilities and Wi-Fi hotspots in parts of the province, it simply doesn’t have the infrastructure or spectrum in Manitoba to enter and pose a timely or credible threat on the wireless side of things. Even if they were to receive subsidies (in the form of divested spectrum or towers from Bell), by the time they established a footprint big enough to credibly offer service, the prices would have already risen, and the damage will have been done. And that’s if Shaw is even interested in getting into wireless in Manitoba, which is by no means guaranteed, and from all signs, highly unlikely.

Third, Bell’s comments about “more competition” are designed to suggest to the Competition Bureau that the proposed post-merger wireless marketshare split (40% (Bell), 26% (Telus), and 34% (Rogers)) would be an improvement over the present distribution of subscribers (50% (MTS), 34% (Rogers), 7% (Bell), and 9% (Telus)). While these numbers might look like an improvement on paper, they hide several factors that are critical for understanding how market dynamics might look in a post-merger Manitoba.

For one, Rogers relies heavily on a network sharing agreement with MTS in order to provide service in the province. Unless Bell continues that agreement after the merger, Rogers will likely find itself losing the ability to fully serve the needs of its Manitoba customers, meaning that the balance of market power will tilt even farther in Bell and Telus’ favour. Another thing that has to be considered is that Bell and Telus themselves share a network, so the proposed divestiture of subscribers from Bell to Telus means that those customers may really just be transformed from retail to wholesale customers of Bell. Seen in this light, it may be more accurate from the perspective of market analysis to view Bell and Telus as one provider (or one and a half). The fact that both firms will be relying on a single infrastructure to supply services also means that they will have intimate knowledge of each others’ operations. The Competition Bureau recognizes that information sharing between “competing” firms could present the risk of coordinated behaviours, like price maintenance or quality reductions (e.g. data caps), and so  the merger should raise concern about whether Bell and Telus truly act as independent competitors.

Furthermore, in the event that Rogers does maintain a sharing agreement with Bell post-merger, problems could arise that go beyond the scope of competitive concerns. Winding up with a situation in which all three network operators share one set of infrastructure could raise public safety issues, with respect to redundancy and the availability of fall-back networks in the event of a natural disaster. Indeed, this potential outcome could be worrying to many Manitobans, particularly right now as the province is presently facing a number of out of control forest fires.

These are just some of the potential issues that the merger raises, but you won’t be hearing about them from those who are pushing for approval. The dialogue surrounding the deal is already chock-a-block full of superficial and misleading statements designed to support the takeover, and that’s why it’s crucial that the Competition Bureau and the Trudeau government hear from concerned citizens and consumers who will be directly affected by this deal.

Beyond the Competition Bureau, the newly-minted department of Innovation, Science, and Economic Development (ISED, formerly Industry Canada) should also scrutinize the deal. Whether it will or not is another matter, but this week’s decision to uphold a CRTC decision requiring Bell and other telecom providers to share access to their fibre networks provides good reason to be optimistic that ISED will give the Bell/MTS merger the serious scrutiny it deserves. ISED is responsible for ensuring that public resources — Canada’s radio spectrum, most importantly — are put to good use, and this has for some time meant making sure that control over spectrum doesn’t become too concentrated. While the “four carriers” approach may have been the hallmark of the previous government, there is no reason to abandon sound public policy now. Indeed, ISED would not be alone in opposing such a merger — European regulators recently blocked a four-to-three wireless merger in Britain, due to well founded concerns over unfair price increases and the potential for other anti-competitive mischief.

After five months in office, the Trudeau government has — at least until this week — had very little to say on the topic of telecommunications policy. The silence has been striking, especially compared to the previous government. Yet, there are signs that the government has not been completely idle. Critically, CRTC Chairman J. P. Blais recently took the extraordinary step of publicly calling on the government to establish a national digital strategy. Blais pleaded with the government to provide vision on how to achieve the task of ensuring that all Canadians have access to broadband technologies and services. Virtually everyone recognizes that modern communication technologies are central to much of what we do, and the Government needs to step forward and lend a guiding hand to make sure people aren’t being left behind.

This week’s decision on network sharing was a good first step, and may provide an indication of the direction of things to come. Although still in the early phases, Heritage Minister Joly’s top to bottom review of Canadian cultural policy could be another stride in the right direction. How the Government acts in relation to Bell’s bid to acquire MTS will be yet another indicator that will help to reveal the lay of the land. One thing that’s sure in all this is that the Government will not arrive at good policy outcomes in a vacuum. Unless ordinary citizens make themselves heard, the loudest voices the Government hears will be the industry’s lobbyists, lawyers, and executives.

I strongly urge anyone worried about the effects of this merger to voice their concerns. Writing to the Competition Bureau should only take a few minutes and can be done using an online form. Writing a letter or email to your MP would also go a long way to letting policymakers know how to act in your best interest. The deal is moving quickly, so the sooner they hear from you, the better.

Dr. Winseck and I are working on a report assessing the effects of the merger to be submitted to the Competition Bureau early next week. Once submitted, it will be publicly available, and I’ll update this post with a link so you can have a look for yourself.

Update: Here’s a link to the report I filed together with Dr. Winseck to the Competition Bureau on May 25. 

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